Is now the right time for a home equity loan?

Q: I missed the big home equity boom; but now that my house is finally above water, should I celebrate by getting a home equity loan?

A: Congratulations on starting to build home equity, but before you start celebrating by taking out a home equity loan, consider the following:

Do you have enough home equity? Just getting the value of your home above your remaining mortgage balance is not enough to qualify you for a home equity loan. The Los Angeles Times recently found that mortgage lenders were looking to limit the combined amount of first and second mortgages to 85 percent of the property's value. That means you would need more than 15 percent equity before you would be considered for a home equity loan.

Can you afford the payments? The value of an asset and cash flow are two very different things. Just because your home has sufficient value to borrow against does not necessarily mean you have the cash flow to make the loan payments. When you look at your current income minus expenses, is there room for a loan payment? You need to be especially careful about this now that mortgage rates have started to rise. The decline in home prices isn't the only thing that destroyed home equity when the real estate bubble burst; some people squandered that equity by taking on obligations they could not afford.

Is this a need, or a want? A good rule of thumb for any home equity loan is that it should be for something you need, not for something you merely want. After all, the roof over your head is something you need, so anything you borrow against home equity for should be equally important before you put your home on the line for it.

In the end, many people who participated in the home equity borrowing boom wished they hadn't. People like you who missed out have the benefit of being able to learn from those mistakes.